European Central Bank to ‘Recalibrate’ Monetary Policy by December

The European Central Bank pledged to “recalibrate” its monetary policy by the end of the year, but left the door open to an emergency consultation of its rate-setting body should the economic picture darken ahead of the regularly-scheduled December meeting.

ECB economists “are already at work” in adjusting forecasts to reflect the acceleration of Covid transmission throughout the eurozone.

 “On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation,” said ECB President Christine Lagarde following Thursday’s rate-setting meeting.

Any policy changes could encompass “all our instruments .. and is not just PEPP specific,” said Lagarde, referring to the Bank’s Pandemic Emergency Purchase Programme, under which the ECB has deviated from previous allocations of country debt to purchase greater volumes of sovereign bonds from nations hardest hit by the pandemic, such as Italy and Spain.  The council could also revise the “durations, volumes and attractiveness” of the securities included in asset purchase programmes, she added.

The ECB president acknowledged the significant downside risks to previous forecasts in light of recently-announced restrictions on European populations, including near-national lockdowns in Germany and France and refused to rule out the prospect of an economic contraction in the the fourth quarter.

“We expect the number for November to be very negative,” she said, which could jeopardise the current forecast of an 8% decline in GDP over the full year.  However, Lagarde acknowledged that third quarter output — due for release on Friday — could surprise on the upside.

Given the increase in economic uncertainty, Lagarde refused to rule out a change in policy ahead of the scheduled December meeting.  The Governing Council “can meet together at very short notice” to discuss “any new specific issue,” she said.  “If we have to meet on short notice … we stand ready to do that.”

Unusually, the Governing Council referred to “developments in the exchange rate” in the opening paragraph of its monetary policy announcement, despite the president’s recent aversion to discussing a sharp appreciation in the euro since the start of the pandemic.

“We are very attentive to exchange rates,” Lagarde said, responding to a question posed by Mace News.  But “we do not think at this point that this is the driving factor” in dampening inflation.

Eurozone consumer prices retreated by an annual rate of 0.3% in September, extending a 0.2% decline in August, and Lagarde believes “inflation is likely to remain negative until early 2021.” However, the ECB president does not view the fall as evidence of deflation, as she expects consumer prices to begin rising by the middle of next year.  The ECB has failed to meet its inflation target of close to but below 2% for over a decade.

The ECB’s interest rates remain on hold, with the deposit facility steady at -0.5%, while bond buying under €1.35 billion PEPP will continue.  The Governing Council was unanimous in this decision, and was “in complete agreement” in “concluding” to adjust policy in December, Lagarde said

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